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U.S. Federal Reserve Chairman Ben Bernanke will take the podium this Friday at the economic policy summit in Jackson Hole, WY, as traders hang on every word hoping he'll deliver a clear signal of central bank action in 2012.
They have good reason to think the Jackson Hole Fed meeting can move markets. It was at this summit two years ago in August 2010 that Bernanke announced an economic stimulus program that came to be known as Quantitative Easing 2.
QE2 consisted of the Federal Reserve inflating its balance sheet to purchase $700 billion in U.S. Treasury bonds from November 2010 to June 2011. This was necessitated as no investors, either foreign or domestic, could be found to purchase U.S. Treasury bonds at such low interest rates.
Now, two years later, the U.S. economy has economic growth falling with unemployment rising. Consumer confidence is at record low levels. Lending institutions are processing millions of properties through various stages of foreclosure. Businesses are sitting on record levels of cash, preparing for the worst, rather than investing in job-creating plants, equipment and machinery.
Oil prices are also rising, which will have a negative impact on the U.S. economy. The more money sent overseas to pay for imported oil, the less there is to buy the goods and services that raise the level of employment in the United States.
This was how things were in 2010. Actually, things seem worse now since Standard & Poor's in August 2011 downgraded the credit rating of the United States.
In an attempt to change this gloomy outlook, the Federal Reserve is letting it be known that it will act again in a major way, like in did in August 2010.
But, like that year, no new policies will officially start until after Election 2012.
The Federal Reserve cannot be seen as doing anything that might influence voting when Americans go to the polls the first Tuesday in November. That is the way it was in 2010, and that is the way it will be this year.
Signals Ahead of Jackson Hole Fed Meeting
The Fed has been hinting ahead of Jackson Hole that more action is on the way – even if it doesn't implement the moves until the end of the year.
In an unusually clear statement last week, the Federal Reserve declared that something had to be done about the woeful condition of the U.S. economy.
From the minutes of the most recent Federal Open Market Committee (FOMC) meeting, the Fed reported that, "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery."
In addition, the President of the Boston Federal Reserve, Eric Rosengren, stated in a recent interview that, "If there's a slowdown and you have an independent central bank,the appropriate response is to act. I think that's exactly what we should do."
According to an article in The Wall Street Journal, Rosengren "…called on the Fed to launch an aggressive, open-ended bond buying program that the central bank would continue until economic growth picks up and unemployment starts falling again."
This Friday would certainly seem to be the time for Bernanke to announce "additional monetary accommodation."
The most likely initiative will be more Treasury bond buying by the Federal Reserve. Operation Twist has had little impact on the U.S. economy. That was clearly stated in the recent Federal Reserve statement.
All Fed moves have driven markets higher, to varying degrees.
By means of comparison, the Standard & Poor's 500 Index rose by 43% during the first round of quantitative easing and 30% for the duration of QE2. For Operation Twist, the S&P 500 Index has only gained 18%.
Even the hint of further central bank action at the Jackson Hole Fed meeting could nudge markets higher next week.
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